Views and Ideas

US & European banks: what matters and what does not

03 May 2023

This content is for professional investors only as defined by the MiFID.

Is the banking crisis over yet? We do not think so. Banks can die or feign their death in many ways, and it may not be as violent as it was for Credit Suisse, but we are not out of the woods yet. The stress stemming from US regional players should not be taken as a read of European banks, as we have explained in previous notes. However, this should maintain a floor on bank bond spreads across their capital structure for the next few weeks. 

It is important to avoid clickbait headlines and misleading indicators. Let’s analyse the current batch of Q1 results, which is now over in the US, but still unfolding in Europe. We aim to give you simple answers to questions that may arise or have arisen in the last few days. It is all about “separating the wheat from the chaff”.

1/ The results of European banks will not matter for bank bondholders.

It may sound bold to make that claim as we are still in the middle of the Q1 results announcement season, but we already have enough evidence so far to state that nothing tremendous is happening in Europe. 

Bank equity and bondholders and analysts are subject to passing fads when it comes to assessing balance sheet robustness. In the past few years, we were mostly looking out for solvency ratio and non-performing loans trends, which were improving dramatically. All eyes are now turning to customer deposit trends, liquidity ratios and exposures to commercial real estate. This too shall pass. 

Santander unveiled its results on April 25 with quarter-on-quarter Spanish customer deposits dropping by 5.6% and its stock price largely underperformed other bank stocks on that day due to this headline (along with poorer profitability in Brazil). Could that be the sign of upcoming liquidity stress? No, definitely not.

Here is why: (i) customer deposits on a group basis were down only 1% on a QoQ basis and were up by 4% YoY, (ii) customer deposits in Spain were up by 7.9% YoY, (iii) management stated that most of the QoQ Spanish deposit decline was driven by corporates and CIB in January mostly, before the onset of the banking crisis. Customer deposits can be and are volatile, are subject to seasonal adjustments and depend on both customer-type lending and geographical mixes, and it seems like investors have forgotten about that.

Anecdotal evidence from other bank results in Europe has shown so far that there was nothing significant to see here. 

As a conclusion, long-term trends on banks matter more than quarterly figures. Do not hold your breath on this season of results from European banks.

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